The Real Causes of Inflation

As expected, politicians running for office have been blaming Joe Biden for our economy’s high inflation rate. Since no blamers provided any information to support their claims, we did some research and analysis to determine what caused our inflation rate.

When the demand for products or services grows faster than the supply, prices will always increase; how much and how is anyone’s guess, but once inflation starts, it is hard to stop.

Debt doesn’t directly cause inflation, but when a country has too much debt, its leaders often try to cure its economic problems by creating tons of money out of thin air. They hope flooding their economy with funny money will quickly relieve some pain and stimulate meaningful economic growth. Unfortunately, this rarely happens.

When a country starts printing money to pay its bills and service its debt, it indicates deep-seated economic problems that can’t possibly be cured in a few months.

Before Covid-19 hit us, we had been living beyond our means for over forty years by filling the gap between earnings and spending with government and privately borrowed dollars. This increased our Total Credit Market Debt From 163% GDP in 1980 to 382% GDP in 2020. 

Fear of Covid-19 and resulting lockdowns disrupted normal commerce processes around the world. Shortages of products, materials, employees, and transportation capacity developed in important supply chains, causing sales, profits, jobs, and paychecks to drop like rocks.

To hopefully disarm Covid-19, prevent an economic meltdown, and restore economic growth, the Trump and Biden administrations passed spending bills that created huge budget deficits of 15% GDP ($3,132 B) in 2020 and 12% GDP ($2,775 B) in 2021.

When Covid-19 was finally under reasonable control, prices started rising in early 2021 when the strong desire to resume normal activities plus ample supplies of savings, free government money, and cheap credit, crashed into our economy that could not supply everything people wanted to buy.

Next, the anticipation of Russia’s invasion of Ukraine put additional upward pressure on prices, followed by Russia invading Ukraine in February 2022. The result was drastically reduced supplies of oil, fuels, grains, fertilizer, and other essential products that increased the prices of almost everything around the world.

Then, when inflation became a hot topic on the evening news, many producers, distributors, and retailers used it as cover for raising their prices more than their costs. Some call it good business; others call it greed.

Covid-19, the Ukraine war, and the reaction of the business community increased our inflation rate from 1.4% in January 2021 to an average of 8.6% from March to August 2022.

Mark Zandi, the chief economist of Moody’s Analytics, estimated Covid-19 added 2.0% to our inflation rate, the Ukraine war added 3.5%, and Biden’s spending added 0.1% to our underlying inflation rate of 2.3%

Zandi’s numbers say 88% of the increase in our inflation rate was caused by Covid-19’s damage to our economy and the Ukraine war, not Biden’s spending initiatives.

Joe Biden didn’t develop Covid 19 in his garage, didn’t create the post-pandemic supply chain problems, didn’t ask the Russians to invade Ukraine, and didn’t tell businesses to gouge their customers by raising their prices far more than their costs.

And he didn’t create the massive mountain of government and private debt he inherited, or export inflation to other countries around the world.

Blaming the Biden administration for our high inflation rate is like saying the avalanche that killed ten people was started by the last snowflake to fall while disregarding the fifteen feet of snow that was already on the mountain before the snowflake hit the surface.

It’s fair to say the Biden administration’s spending is a small part of our inflation problem, but if you want to blame Joe Biden for all of our economy’s problems, including inflation, you must include every president and administration from Trump all the way back to Reagan.